G-IV Visas: Taxation on US Source Capital Gains

An individual residing in the US in G-IV visa status (“G-IV Taxpayer”) is generally taxed as a nonresident alien even though the individual may live in the US for an extended period of time. Generally, nonresident aliens are not subject to US capital gains tax with the exception of real property located in the US. However, there is an exception to this rule for nonresident aliens who have been in the US for more than 182 days in a given year.

US resident aliens are generally taxed in the same manner as US citizens. This means that their worldwide income is subject to tax and must be reported on their US income tax return. An individual is a US resident alien for US taxation purposes if they are a lawful permanent resident of the US or they meet the requirements of the “substantial presence test”. Under the substantial presence test”, non-US citizens are US residents for US income tax purposes if they are in the US for more than 182 days in a given tax year. There is a three year rolling period for computing the days in any given year that count against the more than 182 day threshold which has to be taken into account in this regard.

Employees of international organizations in the US on G-IV visas and employees of foreign governments are exempt from the substantial presence test; they are generally subject to tax on their income only from US sources. In other words, they are treated as nonresident aliens for US tax purposes even though they are present in the US for more than 182 days during the tax year. Also, their earned income from working for the foreign government or international organization in the US is exempt from US income taxation.

There are multiple reasons that employees of foreign governments and international organizations are exempt from the substantial presence test, which include US citizens receiving reciprocal treatment in foreign countries and it is sound policy for the US to have strong diplomatic relations with foreign governments and have international organizations operating within the US. With this in mind, one would wonder why Congress created the special exception to the exclusion of recognizing capital gains for nonresident aliens in the US for more than 182 days. It is clear that this exception only applies to nonresident aliens who are in the US under a special status and are exempt from the substantial presence test; otherwise, a nonresident alien in the US for more than 182 days is a US resident for US tax purposes and subject to US taxation on their worldwide income.

Understandably, there are many nonresident aliens in the US under a special status and exempt from the substantial presence test that are unaware they are subject to US tax on their US sourced capital gains, and are therefore likely not compliant with their US income tax filing obligations. From conversations with nonresident aliens in the US under this status, other foreign countries that they have worked in under a similar special status do not impose this surprise income tax on capital gains.

Nonresident aliens are taxed at a rate of 30 percent of the amount they receive from sources from within the US as interest (other than original issue discount, bank deposits, and portfolio debt), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodic gains, profits, and income. Nonresident aliens are generally exempt from recognizing tax on capital gains from US sources. This is of course with the exclusion to nonresident aliens who have been in the US for more than 182 days in a taxable year. The reasoning that is generally provided for excluding US sourced capital gains from US taxation is that it was determined to be difficult to enforce or administer. However, it is not known why taxing the US sourced capital gains of a nonresident alien who has been in the US for more than 182 days is more feasible to administer. From a US tax reporting perspective, the government would receive the exact same tax filing information from a nonresident alien in the US under a G-IV visa as they would from a nonresident alien living outside the US.

It is important to point out that there are conflicting agency interpretations of the extent of the reporting obligations on US sourced capital gains for nonresident aliens in the US for more than 182 days. There are certain publications provided by government agencies that indicate that the reporting requirement is on all of the nonresident aliens capital gains for a given tax year. It would seem from the section of the statute that this exclusion is provided and by the fact the statute does not simply provide that a nonresident alien in the US for more than 182 days is subject to tax on their worldwide capital gains, the information provided in the publications are not accurate, and unfortunately would lead one subject to taxation under the provision to report more income than they are required. It will be important for nonresident aliens subject to taxation under this provision to seek appropriate tax advice.

On another note, if a nonresident alien subject to the special US capital gains tax is required to file a tax return, if they are also subject to tax on US sourced dividends or other US sourced income at a flat rate of 30 percent, there may be a treaty in place with the nonresident’s home country that includes a provision to reduce the rate of the tax imposed on those US sources, usually to 15%. Depending on the extent of a nonresident aliens US sourced income subject to a 30% flat tax, it may not be worth the time to obtain a US taxpayer Id number and file a US nonresident tax return to obtain the refund from US source withholding tax due to reduced tax rates provided in provisions of a treaty. However, for nonresident aliens subject to the special tax on US sourced capital gains, they will be required to file a tax return and should seek the benefits provided under a treaty with their home country.

The subject of this article similarly applies to foreign diplomats, consular officers, foreign students, or scholars visiting the US in A, F, J, M, or Q nonimmigrant status